Singapore Gets Serious

China may be dominating the headlines, but my current nation of residence, Singapore, made some news of their own last night. After an off-the-charts 32.1% Q1 GDP number, the Monetary Authority of Singapore (MAS) came out swinging against inflation by announcing a one-off revaluation of the Sing Dollar (SGD), along with a move to an appreciation bias against the basket. Nizam Idris, a strategist at UBS, noted:

“The double-barrel monetary tightening was an uber- aggressive move. It tells me that the economy is expected to do very well and there are concerns about long-term inflation and asset- price inflation, which argues for a much stronger currency.”

Now you may be asking yourself what these actions actually mean, and for that matter, who the MAS even is. The MAS is the effective central bank of Singapore and they control monetary policy a little differently than we’re used to in the U.S.

The Singapore Dollar (SGD) is allowed to trade in a band against a ‘basket of currencies’ whose composition is undisclosed. It’s different from a currency that’s just pegged (like the CNY) as the MAS also lets the SGD float around the targeted midpoint in a band of a few percent. Most banks create some model based on size of trading partners to try to replicate the MAS basket to forecast moves in the SGD.

Let’s say on a particular day the USD and JPY are both appreciating against most other currencies, based on their weight in the basket, the MAS will let the SGD appreciate a certain amount as well. It’s when the currency starts being pressed against the outer reaches of the ‘band’ that the MAS will make its presence known. It was always fascinating when all the major ccy’s were volatile and the SGD was following suit, and suddenly the MAS would absolutely shut down currency movement with massive orders. They do this 24 hours a day to maintain the integrity of the currency band, and as a trader, you knew when it was time to step back.

Now that is how they monitor the band on a daily basis, but what did their policy actions yesterday actually do? As mentioned above, there is an effective midpoint of the band around which they allow fluctuation. Their action of a “one-off revaluation” was significant because they moved that midpoint or central target, making the SGD effectively stronger against the basket. It would be the same as if China revalued the Yuan from the current 6.83 to 6.53 in one shot, but with the SGD it’s against a basket as opposed to just the USD.

The second, and slightly more complicated aspect, was the move to an “appreciation bias”. Based on inflation expectations, for each policy meeting, the MAS will decree either a “bias” that will slowly let the midpoint either strengthen, weaken, or remain stable against the basket. The MAS announced a switch from the neutral bias, to the new “appreciation bias”. The midpoint around which they let the currency fluctuate will now slowly be allowed to appreciate against the basket over time. This allows for a very gradual intrinsic appreciation of the currency to help fight inflation.

Whether or not my mechanical explanation above makes any sense, what is important is that this is the first time in 39 years that the MAS took the “double-barreled” action of a one-off reval plus a change in the bias. This should be significant for Southeast Asian growth expectations along with regional currency views. Whether this is a prelude to a China move remains to be seen, but what can’t be denied is, with an absurd 32.1% GDP growth number in Q1, Singapore is getting serious about fighting inflation.